Warsh vs Bessent: A Clash of Approaches Ahead of Jackson Hole

US Treasury Secretary Scott Bessent's decision to buy back longer-dated securities has failed to calm long-term borrowing costs, which remain a dominant driver for the USD/JPY exchange rate.

The US Treasury is trying to limit the rise in long-dated US bond yields, but old habits die hard. The historic relationship between yield spreads and USD/JPY remains strong, making any material moves in US borrowing costs influential this week.

A correlation matrix shows that over the past five days, USD/JPY has a 0.76 correlation with the 10-year US Treasury yield and an even stronger 0.84 relationship with the 30-year US Treasury yield. This suggests that the main show in town is what's happening in US borrowing costs.

Fed Chairman Kevin Warsh will deliver the keynote address at Jackson Hole, but he looks snookered ahead of his appearance. If his preference is to let markets figure out where financial conditions should sit, how does he address the fact that Treasury is now actively trying to influence the very market he wants to do more work in?